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The Internal Revenue Service has had serious shortcomings in its internal controls and financial management systems that caused it to sap its resources in the preparation of its financial statements in the fiscal years of 2004 and 2005, according to a recent report by the U.S. Government Accountability Office.

As a result of the controls and systems flaws, the IRS didn’t keep effective watch over its financial reporting or legal and regulatory compliance, according to the GAO. Thus, the revenue service didn’t “provide reasonable assurance that losses, misstatements, and noncompliance with laws material in relation to the financial statements would be prevented or detected on a timely basis,” the report concluded.

The GAO did note that the IRS’s financial statements for fiscal years 2005 and 2004 were fairly presented “in all material respects.” It also acknowledged that the IRS has “continued to make great strides in addressing its financial management challenges and has substantially mitigated several material weaknesses in its internal controls.”

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In fact, for fiscal 2005, the GAO credited the tax service with successfully implementing the first phase of its new Integrated Financial System (IFS).The system is intended to replace the outdated financial management systems the IRS used in recent years to process and report administrative (nontax) transactions.

“This first phase of IFS provides for improved audit trails and more timely information for such activities and transactions as travel, purchases of goods and services, and budgetary activities,” the GAO report asserted. Further, the IRS continued to progress in terms of addressing its “weaknesses in controls over hard-copy taxpayer receipts and data and over property and equipment.”

But the GAO still considers issues related to the IRS’s controls over financial reporting, management of unpaid assessments, collection of revenue and issuance of tax refunds, and information security to be material weaknesses. What’s more, the accountability office asserted that the IRS didn’t always comply with a law concerning the timely release of tax liens.

“IRS’s most serious financial management weaknesses are rooted in its continued reliance on outdated automated systems,” the GAO report added. “The lack of a sound financial management system that can produce timely, accurate, and useful information needed for day-to-day decisions continues to present a serious challenge to IRS management.”